E-Commerce Times Talkback

The Google IPO is the “Trust-me” IPOThe pending Google IPO has had plenty of buzz recently, but is it just a return to the silly-season? The founders of Google have been frank in their S-1 about the uniqueness of this IPO, in particular how investing in Google will be a bet on the founders.Google, the company, has been impressive. They have a relatively simple business that, based on their revenue and profit results, they are executing well. Moreover, there is every reason to believe that they will continue to grow in the near future due to their business model and well-respected brand. No doubt you are anticipating the “However…”However, there are numerous yellow flags that arise from the structure of this IPO and which beg investors to suspend their hard-won instincts and common sense:Accountability:This is basic stuff, over the long term, where there is lack of accountability results suffer. Is there anyone who has been successful in business who doesn’t know this?The use of series-B shares for the founders that have ten-times the votes per share as the common shares means that the founders are not accountable to common shareholders. This is a “trust-me” IPO in which the founders are saying the equivalent of “trust-me to run this company and if you don’t agree with how I do so—too bad.” At least they openly admit this.The founders have stated in advance that they will not be providing “guidance.” How will investors know whether management is performing? The founders argue that this will allow them to focus on the long term rather than being whipsawed by short-term investor interests. Excuse me, but do the founders really think that investors are too stupid to stick with the stock if management has presented a long-term plan and is executing on it?Motivation:The founders are asking investors to give up their usual checks and balances to trust two founders and a CEO who will become paper billionaires. Certainly the founders truly believe that they will be just as motivated as billionaires as they are today. As a potential investor, do you really believe this?After they have sold enough shares to at least be “cash multi-millionaires” will the founders view “success” in the same way? Will they want to give more of Google’s, and investors’, profits to their chosen causes? Will they prefer to become better golfers than business people?Joint decision-making is an oxymoron:The founders and the CEO are going to make decisions as a “triumvirate.” Where does the buck stop in this company? Who gets fired, and how, if the decisions are consistently bad ones? (Oh, I forgot, management controls the company and cannot be fired.)Joint decision-making may appeal to the romantic but it rarely works in business for the long term. It can work fine when things are going well, but what happens when scrappy competitors take on Google, when costs have to be controlled, when people must be laid off, when business units must be abandoned or when other tough decisions need to be made? Joint decision-making in the face of adversity leads to paralysis.Whose money is it?:The founders state that they will use company man-hours and dollars to invest in various causes. If the founders want to give all of their money to such causes; great for them. But instead they plan to take money and man-hours that could be used to grow the company and provide a return to investors, and put that money into causes that investors may or may not agree with.Some might argue that this social agenda might attract and retain employees. Why would I want to invest in a company that attracts people that want to give away my money? I want people working there that are attracted to the sweet taste of success. To which causes I or they contribute our money is our own business, not Google’s business.What is the purpose of this IPO?:In a typical IPO, investors are providing money that will, at least in part, be used to grow the company.With 455 million in cash, why is Google going public at all? Do they need money for expansion or is this purely a drive for liquidity for the founders and early investors? If they really believe in the long-term success of this company why don’t they take their return from dividends rather than diluting ownership? I recommend you read the S-1 (at www.sec.gov) and see if you can determine a real business reason for this IPO. The “Use of Proceeds” section is so vague that it might as well say “we are going to use the money for stuff.” Saying that they have to report to the SEC, so what the hell, why not go public anyway is not a business reason.Conclusion:While the founders of Google hammer us with their notions of the “long-term” in their letter, this IPO seems a better bet for near-term speculators than for long-term investors. Over the long term, the accountability and incentives essential for success in a tough business environment are not in place.Kevin Schehrer, Ph.D.Boulder, ColoradoAuthor of “Startup, Beyond the Myths…”